Before filling out loan applications or accepting student loans, consider future repayment and whether you or your student is going to be responsible for making payments.
While your student’s financial aid award letter may list federal student loans, be aware that undergraduate students can take out only so much in federal student loans each year. If additional student loans above that limit are required, you may need to consider private student loans or parent loans.
Future Repayment Considerations
Here are some of the considerations you and your student will need to think about when using loans to pay for college.
The debt will need to be repaid.
Student loans are not usually dischargeable for bankruptcy or other financial hardship. When you think about a future repayment amount, remember:
- The repayment amount will be more than the original loan amount. Student loans accrue interest on a daily basis. At certain times, unpaid accrued interest may be capitalized, or added to the principal balance, and begin accruing interest as well.
- Payments may come from a limited income. Carefully consider how much a graduate with your student’s major can realistically expect to make in an entry-level position and how student loan payments may affect a limited budget. Our free online tool, Student Loan Game Plan, can help your student see how student loan debt may have future financial implications and provides ideas for borrowing less.
Interest and other payments can be made during college.
Most lenders, including the federal government, allow early or extra payments on student loans at any time without penalty. In addition, paying interest as it accrues during school can reduce the amount of interest that will need to be repaid after graduation.
College choices matter.
If you find that you or your student cannot afford to take on enough debt to pay the full cost of attendance, a new plan might be essential. Some options for students include:
- Earning more. Your student can increase the ability to pay college costs as they occur by earning more income during school terms and on breaks.
- Reducing expenses. The full cost of attendance may include expenses that can be cut. Can living off campus without a meal plan save money? Are the book and fees and transportation costs realistic for you or your student?
- Asking for help. Are relatives willing to help pay for college? Are additional scholarships, either through the school or outside entities, available?
- Attending a less-expensive school. If the cost of attendance is still not affordable without taking on unmanageable debt, your student may need to consider attending a less-expensive school, at least for a year or two.
Visit Student Loan Game Plan for more information and tips.
Clarify repayment responsibility.
Be sure you discuss with your student who is going to be responsible for making payments on additional private or parent loans that will be taken out. Remember that lenders and federal loan servicers will consider the person who signed the promissory note or credit agreement to be the responsible party regardless of any verbal agreement you make with your student.
Options for Parents Taking Out Education Loans for Their Child
If you intend to take out loans in your name to help with your child’s college expenses, consider these options.
Private Educational Loans
Private educational loans created for parents can be a good option for parents who have solid credit and a low debt-to-income ratio because they tend to qualify for lower rates than are available with a federal parent PLUS loan. Some private educational loan options, like our College Family Loan, do not have origination and payment late fees, while the federal parent PLUS loan has both.
Parent PLUS Loans
The parent PLUS loan is a federal loan that is an option for parents who need more money to pay the full cost of college and may be included in financial aid letters.
Approval for a parent PLUS loan does not take into consideration income, other outstanding debt, assets, income or years to retirement, so consider carefully how much you will realistically be able to repay.
Options for Students Taking Additional Student Loans
Students need to have a creditworthy cosigner for any private student loans, unless they can meet underwriting criteria on their own.
Every lender has its own underwriting criteria, qualification requirements, loan terms and repayment schedules. Before your student signs for a loan or you cosign with your student, research your options. Consider:
- Variable vs. fixed interest rates. A variable rate may go up or down according to market conditions, while a fixed rate remains the same throughout the loan term. A low variable rate is often appealing, but remember that it may change drastically over the loan term.
- Actual interest rate. Many lenders offer different rates based on the applicants’ and cosigners’ credit. If you are unable to determine your rate upfront, consider the highest rates.
- Repayment assistance and benefits. Some lenders or loan servicers offer assistance if a borrower is unable to make required monthly payments. Some loans also offer special benefits, such as a reduced interest rate for making automatic electronic payments. Consider these features carefully.
- Managing repayment. Will additional loans be needed for future years? Should all loans be obtained from a single or limited number of lenders to make repayment simpler? Will consolidating multiple loans later be important, and does the lender offer that option?